The famous "Big Short" investor, Michael Burry, recently sold out of CVS Health Corp. (CVS, Financial). Burry profited immensely from holding the stock during its fantastic bull run in 2021. The chief investment officer of Scion Capital believes it's time to let go of the retail pharmacy chain, though, which is an arguably questionable move.
Health care is where you want to be right now
Health care stocks are usually a go-to option whenever the economy is entering a slowdown or contractionary period as they possess non-cyclical cash flows due to the necessity of the products they sell.
The economy is slowing down as a resut of the World Bank recently revising its global growth forecast downward by 0.9% amid rising inflation and the war in Ukraine. It's unlikely that any catalysts will arise that could change the trajectory of the downward spiraling economy, prompting me to believe investing in the health care space is necessary.
CVS is operationally sound
CVS released its year-end earnings report in February, and things are certainly looking up. The company produced sound earnings, which increased by 68 cents per share (year over year). Growth stemmed on a company-wide basis, but the 1.7% increase in medical membership and reduction in medical insurance costs were the key catalysts to CVS Health's growth.
Source: CVS investor presentation
Burry is disregarding momentum
Burry seems to have forgotten the golden rule of the modern market. Mark Carhart discovered in 2014 that momentum is one of the most critical aspects of stock selection. The theory suggests the past 12 months' winners will most likely be the following 12 months' winners. This study was elaborated on by Elroy Dimson, a professor at Cambridge who discovered that momentum stocks exhibit an average of 17.5% excess annual returns over the S&P 500.
I used Carhart's four-factor model to price CVS Health, and it's clear the stock is a momentum play as it produces an excess return of 0.10% over the benchmark index during momentum periods. Furthermore, the company is trading above its 10-, 100- and 200-day moving averages, indicating it has formed a short-term momentum pattern.
Source: Portfolio Visualizer
Valuation
CVS is a significantly undervalued stock. It is trading at a price-sales discount of 2.12 and a price-sales sector discount worth 44.12%. Furthermore, the company's earnings per share are not just rising high at 8.63 times, but GuruFocus estimates that it will proliferate even further, which could bring much residual value to its investors.
The bottom line
CVS Health does not have any recognizable fault lines. There is no suggestion whatsoever as to why Burry recently sold out of his position. The company's operating results are firm, and its stock is a price value play. Additionally, Carhart's four-factor model exhibits strong momentum attributes for the stock.
